Sugin: Rhetoric and Reality in the Tax Law of Charity

Linda Sugin (Fordham) has a new article out Rhetoric and Reality in the Tax Law of Charity, 84 Fordham L. Rev. 2607 (2016) that looks essential to anyone who is interested conceptually in the place of charity in state law and tax law. The abstract:

“The rhetoric of public purposes in charity law has created the mistaken impression that charity is public and fulfills public goals, when the reality is that charity is private and cannot be expected to solve the problems that governments can solve. The rhetoric arises from a combination of charity-law history and tax expenditure analysis. The reality follows the money and control of charitable organizations. On account of the mismatch of rhetoric and reality, the tax law of charity endorses an entitlement to pre-tax income and (ironically) creates a bias against taxation. This article reorients the project of defining public and private in the tax law by starting from a normative theory of government responsibility.

It challenges the conventional economic justifications for the charitable deduction and exemption, arguing for a more philosophical approach that makes affirmative demands on government to distribute the returns to social cooperation. Under this approach, the appropriate role of private organizations is residual; they must achieve what governments cannot. The article concludes by arguing that current law’s tax benefits for charity are easily justified in this new understanding.”

Church or Family Business? Puerto Rico Wants to Know

By: Sam Brunson Hacienda

On Friday, Shu-Yi posted an overview of Puerto Rico’s financial problems, and described the centrality of the island’s tax regime to those problems. Today, I’m going to dig into one particular aspect of Puerto Rican taxation: tax-exempt churches.

Last year, the Puerto Rican Treasury department launched an ambitious pilot program[fn1] under which it planned on auditing more than 40 tax-exempt organizations. Juan Zaragoza, Puerto Rico’s Secretary of Treasury, announced that this month the program moves to Phase 3: auditing churches.

As in the U.S., the Puerto Rican tax law exempts some nonprofit organizations from tax. Puerto Rican tax law explicitly exempts

Churches, church conventions or associations, as well as religious and apostolic organizations, including corporations and any community chest, fund, or foundation, organized and operated exclusively for religious purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual.[fn2]

Some tax-exempt churches, Zaragoza asserted, aren’t really churches, but rather family businesses. They make annual profits, just like a shoe store (and yes, his example was a shoe store), but, because they claim to be tax-exempt churches, they don’t pay taxes on their profits. Continue reading “Church or Family Business? Puerto Rico Wants to Know” →

More on Charitable Organizations and Marijuana

By Benjamin Leff

Last Friday, Phil Hackney posted on this blog about IRS Denial 201615018 (4/8/16), in which the IRS denied tax-exempt status under section 501(c)(3) to an organization that planned to support the cultivation and distribution of medical marijuana in a state in which such activities were legal. As Phil pointed out, the IRS held, among other things, that an organization whose purpose is the distribution of marijuana cannot be tax exempt under section 501(c)(3) because “a section 501(c)(3) organization cannot be created for a purpose that is illegal.” This position is not new. The IRS took a similar position way back in 2012.

Phil and I pretty much agree about the law. We both think that the IRS is probably right that under current law an organization whose charitable purpose includes engaging in illegal activities does not qualify for tax-exempt status under section 501(c)(3). Phil says that the law is “absolutely clear on this front,” which I think is a little bit of an overstatement, but that’s a quibble at best. The reason for this certainty is that the United States Supreme Court has held that an organization that had racially discriminatory admissions or dating policies could not qualify for tax-exemption under the so-called public policy doctrine, a common-law doctrine that applies to charitable trusts. The argument for denying tax-exemption for illegal activities is a part of the public policy doctrine, the rationale being that nothing more clearly defines a jurisdiction’s fundamental public policies than its laws, and so illegal activities must violate public policy.

Phil and I also agree on the “enforcement approach” that should ideally underlie the public policy doctrine. We agree that when the IRS is called upon to apply the public policy doctrine, it should do so according to the brightest possible lines. It should maintain “hard and fast” rules. That is because the room for abuse is so great in this area, since the suspect organizations are almost always advancing unpopular or counter-majoritarian values.

Where Phil and I disagree is whether “illegality” provides an adequately bright line to satisfy this enforcement approach. I think that even where conduct is facially “illegal,” there is ambiguity about whether it violates a fundamental public policy, and the IRS should hesitate before making a decision on that score. When it errs in applying the public policy doctrine, it should always err in favor of the organization. That is because when an organization’s conduct is illegal, there is always another enforcement entity that is empowered to enforce the law and prevent the illegal conduct. The IRS should grant tax-exempt status and then defer to the substantive enforcement entity to use whatever sanctions are at its disposal to enforce the law … if it chooses to do so.

Continue reading “More on Charitable Organizations and Marijuana” →

Dark Days: Blindfolding Nonprofit Regulators

By: Philip Hackney.

The Ways and Means Committee voted Thursday in favor of a bill, H.R. 5053, that would seriously hamper the ability of the IRS to enforce charitable tax law and nonprofit tax law generally. It is a bad-no-good-bill, that comes from folks who champion protection from the IRS, but whose real motive is to make it possible for wealthy individuals to act without hindrance in influencing political campaigns and politics generally. It emanates not from a place of conservatism, but a place of reactionarism and plutarchism (neither of which are words, but both of which probably should be :)). The Koch brothers support this bad bill for a reason.

The Bill will harm IRS regulation and make our already relatively secret-and-subject-to-corruption political contribution system more secret and more subject to corruption (the issue that democrats and interest groups focused upon in attacking the bill). The harm though can be expected to extend to the ability of the federal government and states to regulate individuals using nonprofits to accomplish their ends. Sometimes people running nonprofits do bad things. It will increase the dark in which our regulators try to police the nonprofit sector. Unfortunately, the IRS leant a hand to those trying to give donors greater secrecy as high level officials discussed eliminating schedule B back in December 2015. It is still not clear to me what they were thinking, but I genuinely hope we do not make such a foolish choice. As explained below, we have long recognized a regulatory need for this particular information.

What does this dastardly, seemingly well-intentioned, bill do? Continue reading “Dark Days: Blindfolding Nonprofit Regulators” →